Tax Breaks Could Be Biggest Prize In Pfizer Deal For AstraZeneca

For now, Pfizer's world headquarters remains in New York. But a deal for AstraZeneca could turn Pfizer British.

Mark Lennihan
/ AP

Originally published on April 28, 2014 7:00 pm

Pfizer finally fessed up and told the world that it wants to buy British drugmaker AstraZeneca. It wasn't a very well-kept secret.

The New York-based drugmaker confirmed publicly that it approached AstraZeneca in January about getting together. AstraZeneca, based in London, rebuffed the New Yorkers.

Pfizer executives said Monday that they're still interested and wish that AstraZeneca's management would talk to them. Pfizer's offer is worth nearly $100 billion.

If Pfizer succeeds, it would pick up some promising experimental cancer drugs and a business that's otherwise in decline.

Pfizer's management would also be prepared to wield a cost-cutting axe, as they have in the past. Pfizer previously gobbled up Warner-Lambert, Pharmacia and Wyeth. Research labs were closed. Administrative and sales jobs were cut. The savings helped prop up profits.

Like Pfizer, AstraZeneca has seen better days. The company thrived by selling purple pills (first Prilosec, then Nexium) for heartburn. But generics have hurt. Lipitor, long Pfizer's biggest cash cow, has gone generic, too.

Neither company's research labs have covered themselves in glory lately, though there are a few hopeful signs.

So why would Pfizer be willing to pay so much for AstraZeneca? One reason would be to get a comfy new tax home.

Pfizer, founded in Brooklyn in 1849, would become a British company by combining with AstraZeneca, lowering the new company's tax rate dramatically. There's even a euphemism for this kind of move. It's called a tax inversion in the trade.

Pfizer's tax rate was about 27 percent last year. In the U.K. the corporate tax rate stands at 21 percent and will fall to 20 percent in 2015.

Pfizer CEO Ian Read, trained as an engineer and accountant, told analysts and investors in a conference call that it is his fiduciary responsibility to maximize value for Pfizer shareholders. Despite making a tax move to the U.K., he said Pfizer would keep its corporate headquarters in the U.S. and retain a listing on the New York Stock Exchange. "I don't see why there's any conflict with U.S. policy" from the deal, Read said.

But as Forbes' Matthew Herper points out, the administration is no fan of tax inversions and has proposed to make them harder to pull off. Right now, foreign ownership of a company has to hit just 20 percent to make a tax switch overseas legal. The administration's 2015 budget proposes a threshold of 50 percent. If Pfizer moves ahead with a deal, the political pressure to tighten the requirements could mount.

But Bloomberg reports that Pfizer's strategy doesn't look all that risky as far as government action goes. "This is basically an opportunity to go outside the U.S. and still sell in the U.S. and strip the tax base," H. David Rosenbloom, an attorney at Caplin & Drysdale in Washington and director of the international tax program at New York University's law school, told Bloomberg. "If we ever had a legislature in the United States, we could do something about this, but I don't expect to live that long."